Venezuelan oil must not fall under Russia’s tutelage

Larry Kudlow, the president’s chief economic adviser, wrote years ago that upward oil-price spikes lead to recessions. He is right. According to Robert Zubrin, oil-price hikes over the past four decades were followed shortly afterward by a sharp rise in American unemployment.

But there is something else. The world’s oil economy, unfortunately, provides billions to official state sponsors of terrorism, like Iran, and other countries that arguably should be on the list, like Russia and Venezuela.

{mosads}Now, all of this is connected. Venezuela’s economy is near collapse, and its oil meltdown is getting worse. The end of the nuclear deal with Iran could take upwards of another 1 million barrels of oil off the market each day. Add to that the ongoing recurring turmoil in the Nigerian delta and the civil war in Yemen, sitting astride two key oil trade routes on the Red Sea and Persian Gulf, and a future dramatic spike in oil prices is a high probability.

Working to produce more energy independence in America, the administration has strongly supported fracking, secured approval of both the Keystone pipeline and opening up the ANWR oil reserves, as well as ending the EPA’s war on coal. All told administration policy has helped boost American oil and natural gas production in 2014 to the highest level of any country in the world to more than 11 million barrels a day from a low of under 4 million barrels a day in 2008.

Unfortunately, there are additional monkey wrenches that could affect oil production and gasoline availability in the United States. A great fear arises from Venezuela borrowing billions from Russia and China and giving these two U.S. adversaries the leverage to possibly cause economic trouble in the U.S. economy.

Venezuela’s state-run oil company, Petroleos de Venezuela (PDVSA), owns the U.S. company and Houston-based Citgo. In December 2016, Venezuela’s oil company put up a large stake (49.9 percent) in Citgo as collateral in exchange for a loan from Rosneft.

Why is that? Because Russia, in this case Rosneft, Russia’s largest petroleum company, could theoretically seize Citgo refineries and gas stations in the United States that it holds as collateral in case Citgo defaults on its loans.

In 2016, China extended a grace period to Venezuela for its own loans to the country but can demand, under the terms of the deal, that nearly a quarter of all Venezuelan oil exports go to China, further shaking Venezuela’s economy. Such an action may also cut oil available to the U.S. economy at a time when economic recovery here and around the world is pushing economic growth upward and with it the consumption of oil.

There is, however, a possible solution to at least this part of this oil equation. A group of investors have asked the Treasury Department to approve their purchase of the Russian-held debt from Citgo and PDVSA. If Treasury Secretary Mnuchin approves the transaction, the U.S. would deny Russia any leverage they might have.

In April 2017, six senators, warned Treasury of the national security implications of Russia acquiring a large ownership share of a U.S. energy supplier. In June 2017, another group of six Senators again urged the Treasury Secretary to take swift action to protect America’s energy infrastructure from a possible Russian seizure.

In September last year, Sens. Bob Menendez (D-N.J.) and Marco Rubio (R-Fla.) sent a letter to the Treasury that highlights the threat to national security should Rosneft foreclose on Venezuela’s oil properties located in the United States. According to a joint press release the next day, Menendez and Rubio, members of the Senate Foreign Relations Committee, complained that sufficient action had not been taken by the administration even though the administration had previously told the senators they would intervene in a default situation. The letter was deeply concerned that the further deterioration of economic conditions in Venezuela might trigger actions by Russia and others that could seriously affect the security of America’s energy supply, and that the issue was urgent.

There is a possible solution to the problem which The Committee on Foreign Investment in the United States (CFIUS) can quickly approve. In February, Reuters reported:

“Energy and commodities trading firm Mercuria is leading a group of investors seeking U.S. government approval to buy the nearly 50 percent of collateral in refiner Citgo held by Russia’s Rosneft.”

If their license for the sale is approved, and even if Citgo goes into bankruptcy, the new investors would sustain operations, avoid fuel interruptions and continue to employ Americans working for Citgo in the United States. Approval by CFIUS gives everyone a win-win result.  

Since Rosneft is now under U.S. sanctions, CFIUS should act expeditiously to approve the new financing being proposed by this deal.

The United States must ultimately deny Russia potential energy economic and political leverage against the United States and lessen chances that an interruption in supply will spike oil prices and throw the U.S. economy into a recession.

Right now, action by the U.S. Treasury cannot happen too quickly.

Peter Huessy is the director of Strategic Deterrent Studies at the Mitchell Institute for Aerospace Studies of the Air Force Association. He has been a guest professor on Nuclear Policy and Congressional Relations at the U.S. Naval Academy since 2011. Previously, Huessy was a senior defense fellow at American Foreign Policy Council.